A small Nevada auditing firm whose lawsuit challenging the constitutionality of the Public Company Accounting Oversight Board went all the way to the U.S. Supreme Court last year has finally settled its suit with the PCAOB, as a federal court struck portions of the Sarbanes-Oxley Act.
Beckstead and Watts, a small auditing firm based in Henderson, Nev., had filed suit against the accounting firm regulator after it was dissatisfied with a 2005 inspection report. The lawsuit was later joined by a conservative advocacy group, the Free Enterprise Fund, which challenged the constitutionality of the PCAOB and how its members were chosen by the Securities and Exchange Commission under the Sarbanes-Oxley Act of 2002.
The plaintiffs lost several court decisions, but won on narrow grounds before the U.S. Supreme Court last June in a 5-4 decision (see Supreme Court Rules Against PCAOB). The Supreme Court upheld the constitutionality of the PCAOB, but ruled that the limitations on the power to remove the members of the PCAOB only for cause were unconstitutional under the separation of powers doctrine.
Beckstead and Watts managing partner Brad Beckstead announced Wednesday that his firm has settled its lawsuit against the PCAOB. Under the terms of the settlement, the PCAOB has agreed to withdraw its formal inspection report dated Sept. 28, 2005, and release Beckstead and Watts from an accounting investigation it launched in September 2005 without any formal findings.
The PCAOB confirmed the settlement with the firm. “The PCAOB agreed to withdraw one of the two inspection reports issued on Beckstead and Watts, LLP, to date in order to settle that firm's pending litigation against the board," said a statement e-mailed by PCAOB spokesperson Colleen Brennan. "That agreement was based on the unique circumstances of the case and does not constitute an admission or concession with respect to the matters set forth in the report or any issue in the litigation. Consistent with its general practice, the board also advised Beckstead and Watts that the PCAOB had concluded its earlier formal investigation of the firm, without prejudice to the board’s authority to institute a future investigation in connection with any past or future conduct.”
The auditing firm had been seeking a court order nullifying the inspection report after the conclusion of its case in June 2010 against the PCAOB before the Supreme Court.
Beckstead and Watts was one of the first small firms to be inspected by the PCAOB in 2004 after the board had conducted intensive inspections of the Big Four accounting firms. “The inspection was akin to the New York Giants playing the local high school in a game of football,” Beckstead said in a statement. “The time I spent with my staff reacting and complying with the inspection requests put significant burdens on our ability to conduct a profitable business.”
The PCAOB issued a negative inspection report charging the firm with eight audit deficiencies.
In his formal response to the report, Beckstead fired back that if the board ignored cost and efficiency issues, it would likely drive small auditors out of the market.
The PCAOB opened a formal investigation of the firm on the same day it released the firm’s inspection report on its public Web site. The formal investigation subjected the firm to additional work by selecting an additional five audit files, many from the client’s date of inception forward.
“The investigation was the straw that broke the camel’s back,” said Beckstead.
He eventually filed a joint lawsuit with the Free Enterprise Fund charging the PCAOB with a violation of separation of powers and the Appointments Clause of the Constitution.
Beckstead lost the legal battle in two lower courts, but appealed to the Supreme Court under the representation of Washington, D.C.-based legal firm Jones Day. In June 2010, the Supreme Court ruled in favor of Beckstead and Watts, and made a change to the language of the Sarbanes-Oxley Act allowing members of the PCAOB to be removed “at will” rather than “for cause.”
“I was overjoyed by the results of the lawsuit,” said Beckstead. “Our best-case scenario would have been for the Supreme Court to strike down certain provisions of the SOX Act and toss it back to Congress so small business lobbyists could push them for exemptive relief, but I think this case brought to light the burden that over-regulation and over-zealous inspectors can place on the shoulders of small business.”
Late Wednesday, the U.S. District Court for the District of Columbia, to which the case had been remanded after the decisions by the appeals court and the U.S. Supreme Court, handed down its judgment striking the relevant provisions of the Sarbanes-Oxley Act. In keeping with the Supreme Court ruling, it said the portions of the law restricting the authority of the Securities and Exchange Commission to remove members of the PCAOB are unconstitutional on the ground that they violate separation-of-power principles, and that the portions of Sarbanes-Oxley that restrict the Supreme Court's authority to remove board members are severable from the remainder of the statute.
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